From Zero to Growth - a compliance perspective
At Digital 2 Law, we focus on meeting entrepreneurs and startups as early as possible in their journey. The earliest they become aware of any legal issues they may run into, the faster they can iterate on their product to have legal solutions embedded by design into what they do.
Unfortunately, such solutions are not always readily available; while not the purpose of this post, I will single out a couple of reasons why this is the case:
- Entrepreneurs are not aware of the consequences of leaving a problem unsolved. This is an educational problem, because we are not trained during our traditional upbringing to think about laws and rule-making, and how these influence our lives. Also, resources to get oneself up-to-speed on this are not always available when deciding to embark on a first venture, be it during high-school, college or incubators / pre-accelerators.
- Existing solutions are not fit for purpose. The way legal services are sold is very different from the way they are perceived and purchased by entrepreneurs. Lawyers put an emphasis on risk-mitigation (thinking about what might happen), while entrepreneurs want to see the effect an action is going to have on their day-to-day business (thinking about what is happening). Moreover, the way lawyers price legal services is disconnected from the entrepreneur’s mindset (not bearing in mind cash-flow constraints, for instance). Unfortunately, there’s still very little progress to match the expectations of both parties.
In my 5+ years working exclusively in the tech startup space, I have rarely seen a proactive rather than reactive approach of founders towards compliance. However, being proactive compounds itself over time, saving resources (time and money) while the business grows, and stopping compliance issues from becoming acute. This puts the founders in a situation of already having solved such problems with peace of mind when there was no pressure. I think Questo is a good example of this approach.
Questo is a travel-tech company that is reinventing the way holiday destinations are explored through self-guided mobile quests, raised its latest funding round in February 2021. I’ve had the opportunity to know them since their 2016 launch at HowtoWeb’s Startup Spotlight, and have worked together since 2017.
Seeing their trajectory over the years, I have identified several things I think they are doing properly to achieve that “compliance compounded effect”. A few considerations before I lay them out:
- The items below are not meant to create a blueprint for how to approach compliance in general, because there are other constraints that may be at play;
- Since most of the companies I’ve worked with so far are in their early-stage, the perspective refers to them; in later stages of growth, at least part of the compliance may end up being handled internally by a legal department;
- The points I’ve identified are relevant for how to approach legal issues, and not how to solve them. Seek legal help whenever you’re not sure what do.
That being said, here are some items I’ve seen working out:
- Document your legal issues and commit to solving them. Most entrepreneurs see compliance as a cost. I myself don’t believe in advocating for the fines that you might get if you don’t follow this or that legal provision, because it fails to see the entrepreneur’s perspective. But that does not mean that a culture of avoidance towards compliance until the matter becomes urgent (for instance, when you’re about to raise money) is a good approach. Urgency leads to bad decisions: you either pay too much to solve a problem, or you end up choosing a wrong set of terms for your investment because you’re cash-tight and need to move fast. Instead, document the legal issues you know you have, or may face in the future, and whenever resources (time, money, commitment to the process) become available, start solving them one by one. The effect is massive when you see, for instance, how easy and fast funding rounds take shape.
- Build a little bit of legal acumen. This comes in handy particularly during an investment – I think all entrepreneurs should understand the basic terminology of a term-sheet, because they’re the ones making the commercial deal (which comes before the legal deal is finalized). But the compliance compounding effect really happens when you become interested in privacy, intellectual property or getting your day-to-day authorizations in check (Claudiu, one of Questo’s founders, has a story about the regular checks needed on a fire extinguisher). This will again make investments happen fast, but it will also show to an investor you have the management skills necessary to be on top of things when your company grows. Some of these things will end up being outsourced in time, but one thing you won’t outsource is you making sure they happen.
- Train yourself to embrace compliance. From an entrepreneur’s perspective, compliance is a cost to do business, regardless of how much most lawyers sell it as an investment. It being a cost does not mean it’s optional. The only way to opt out of it is if your startup fails (which is ok, but it’s not something you actively wish for). Sooner or later, you’ll face the problems that everybody else faces when running a business, even more so one building proprietary technology and potentially raising investment. The earlier you understand compliance as a necessity, the better equipped you’ll be to understand why and how those problems should be solved.
The team at Questo has put the above strategy at play almost from day one. The consistency with which they have and are implementing compliance in their company has meant taking small steps, when no external pressure existed. This has created a proactive instead of a reactive culture, one that I recommend each founder should implement in their startup when it comes to compliance.